Forex: Stronger Equities Boost Aussie, Kiwi; Franc Bets Unwind
ASIA/EUROPE FOREX NEWS WRAP
Risk appetite is well-supported this morning as investors continue to dump the Japanese Yen and the U.S. Dollar in favor of high beta currencies and risk-correlated assets. While this pressure on the safe havens isn’t unusual – both the Yen and the U.S. Dollar have been lagging for the past several weeks, in particular against the Australian and New Zealand Dollars, as well as the Euro – what is new has been the increased selling pressure seen in the Swiss Franc.
Truly, since the Swiss National Bank implemented the EURCHF floor at 1.2000, the majority of trading has occurred at the 1.2000 bound. While this trend started to change at the end of 3Q’12/the beginning of 4Q’12, the past two days have represented a drastic shift in sentiment regarding the situation in Europe, as well as the views on the Swiss Franc. With respect to the Euro’s side of the equation, one needs to look no further than that surprising European Central Bank policy meeting on Thursday for why the Euro is in high demand.
In regards to the Swiss Franc, the globe’s former darling safe haven during the crescendo of the Euro-zone crisis in 2011 has only served as a hedge against extreme tail risks on the continent since the floor was implemented. Accordingly, as the crisis has ebbed back towards a calmer state, it is of little surprise that demand for the Franc has softened as well. The Swiss CPI reading for December released on Friday shows that deflation is starting to rear its ugly head again, allowing speculators to bet that the SNB will implement further easing policies. Positioning is playing a role too: according to Bloomberg News, the three month 25-delta risk-reversal rate for the Franc versus the Euro reached a record 1.48 percentage points in favor of options to sell, earlier today. Bottom line: the Franc could be on the verge of a major unwind.
Taking a look at European credit, slight weakness in the periphery has prevented the Euro from appreciating further today. The Italian 2-year note yield has increased to 1.357% (+2.8-bps) while the Spanish 2-year note yield has increased to 2.391% (+4.4-bps). Likewise, the Italian 10-year note yield has increased to 4.146% (+2.7-bps) while the Spanish 10-year note yield has increased to 4.936% (+7.9-bps); higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 11:40 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.09% (-0.04% past 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: The pair has continued higher, cutting through the May 2012 high at 1.3280 and running into the next leg up, the March 2012 high at 1.3380/85. Last week I said: “the RSI downtrend on the daily chart has been broken, despite price holding below the May/December highs at 1.3280/3310. Coincidentally, focus is on buying dips.” This remains to be the case even as price has started to catch up to momentum. Support comes in 1.3280/3310, 1.3120/45, 1.3060/65 (50-EMA), and 1.3000 (January low). Resistance is 1.3380/85 (mid-March swing high) and 1.3485 (late-February swing high).
USDJPY: No change: “The pair’s rally has continued to its highest level since June 2010, essentially leaving the door open for a run above 90.00. Given BoJ policy, any dips seen in the USDJPY are viewed as constructive for further bullish price action (though I would like to clarify that this view is only valid until the BoJ meeting on January 22; the market remains very net-short the JPY, so a near-term top marked by an event seems possible (think the US Dollar bottoming the day after QE3 was announced)). Resistance comes at 89.10/35 (daily high, weekly R1) and 90.10/15 (monthly R2). Support comes in at 88.40 (monthly R1) and 87.00/40 (weekly pivot).”
GBPUSD: No change: “The pair has fallen back from 1.6300, again, though with no follow through yet, my levels remain the same (they haven’t changed since early-December). However, the pair is now coming into ascending TL support off of the July and November lows at 1.6000. Support is there and 1.5900 (200-DMA). Resistance comes in at 1.6085/90 (50-EMA), 1.6180, and 1.6300/10 (post-QE3 announcement high in mid-September).” It should be added that a break below 1.6000 could accelerate through the 200-DMA towards the most recent swing low, at 1.5820/25 set in mid-November.
AUDUSD:No change: “The pair has broken the December highs and a break signals a push towards 1.0605/25. However, it’s worth noting that the daily RSI hasn’t pushed into overbought territory on any rally since February 2012. Accordingly, we’ll either see a move to new highs and with RSI confirming the breakout; or further consolidation/pullback is in order before the next leg higher. Support is at 1.0530/50 (weekly pivot, monthly R1), 1.0465/70 (weekly S1), and 1.0400/05 (weekly S2). Resistance is 1.0530/85 and 1.0605/25 (August and September highs).”
S&P 500: For the past several weeks I’ve maintained: “The S&P 500is back above a very significant zone of 1445/50 (descending trendline off of September and October highs, 100% Fibonacci extension off of the November 16 low, the November 23 high, and the November 28 low extension), and a move higher necessarily points to 1470/75.” With these levels to the upside breaking, a move above the September highs points to resistance at 1500 and 1520/25 (December 2007 high). Support comes in at 1450/55, 1425, 1400, and 1390 (200-DMA).
GOLD: No change: “Gold is at a make or break level right now, former Symmetrical Triangle support at 1630/40, and its lowest level since August, before the ECB and the Fed’s QE intervention hopes took hold. Additionally, when considering the move off of the September highs, a measured A-B=C-D (as expressed on the Daily) suggests that a bottom could be in place at these levels as well. Support is there at 1580. Resistance is 1690/95, 1735, 1755, and 1785/1805.”
--- Written by Christopher Vecchio, Currency Analyst
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